Ron O’Hanley: Hi Mark, it's good to see you. I can't think of a firm that's more important to talk to about the ETF than BlackRock. BlackRock is not only the largest ETF player, but it really has shaped the ETF industry. As we get started, and before we start talking about BlackRock, I'd like to talk to you about how you view ETFs as having shaped both investments and capital markets – and let's start with investments.
Mark Wiedman: First of all, I want to say thank you for the privilege of joining you. Thank you to State Street for putting this together. 30 years – State Street, a pioneer and a long-term partner of us at BlackRock in many ways, including in building the ETF industry. So, when you talk about the ETF, we're really talking about a fund that trades like a stock. It's an investment vehicle but it's also a capital markets instrument. That's been a transformational move.
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text: ETF influence on capital markets
Ron O'Hanley: What has it meant for capital markets, Mark?
Mark Wiedman: You know, the capital markets transformation the ETF has brought comes from a simple magic. And the magic is taking underlying exposures and converting them into a secondary vehicle that trades in exchange. So it used to be, before the launch of the first ETFs, you had to buy all the individual stocks and then, later on, when we had bond ETFs, the alternative was buying all the individual bonds. Today, you go out and, with one transaction at the current market price, you can get that whole big bundle. And the magic has been for many ETFs, not all, but many, is that a layer of secondary liquidity has come on top of that. That layer of secondary liquidity has allowed underlying asset classes that are less liquid, like high yield, to actually become much more efficiently priced and transparently priced in the public markets or trading Japanese equities in New York while Tokyo is sleeping. That transformation, that creation of a secondary liquidity layer that allows people to transact, buyers and sellers coming together in crisis, moving quickly to reset prices, has been a stabiliser. So when I look back, I think the ETF's impact on investments has been amazing, but in capital markets, it's been transformational.
Ron O'Hanley: This point you're making about secondary liquidity, particularly in fixed income, is very important because if you look at what happens and you use the example of high yield, which is a great example, the liquidity of the actual bundle is much greater than the underlying securities. And at a time when there's less and less liquidity in some of these underlying markets, the role that ETFs play is actually quite important. So I'd agree with you.
Mark Wiedman: The ETF has, over and over again, shown that it is a systemic stabiliser, and the best example I would point to is the 2020 pandemic crisis. We saw – we'd already seen in the US for at least six or seven years – that, in times of stress, bond ETFs would create extra layers of price discovery and liquidity. But then we saw in March of 2020, in Europe for the first time, a surge in secondary liquidity that took stress off of bank balance sheets. But that's OK, because what happened was buyers and sellers for the first time in Europe found a surge in liquidity out in the secondary markets. And so now we’re seeing a maturity in the capital markets for both Europe and the US, where this transformation happens out there and doesn’t require those leverage balance sheets any more.
Ron O'Hanley: Yes, I'd agree with that. And, also, this is a much more shareholder-friendly way, in times of stress, to the extent to which there are redemptions. Every shareholder is treated fairly and equally. It's not this concern that we have sometimes in mutual funds where the first out get treated better than the last out. The ETF, everybody out gets treated in the same way.
Mark Wiedman: You know, Ron, I think that’s really important for people to understand. This creation and redemption in kind, as supposed to in cash, means that if somebody comes out of the ETF, a market maker comes out actually having said, I for a given price will take these underlying securities. So they’ve made a trade.
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text: BlackRock and ETFs
Ron O'Hanley: Mark, let's turn to BlackRock. Though today, BlackRock and iShares are synonymous, BlackRock was a force before ETFs. Talk about how ETFs have changed and transformed BlackRock.
Mark Wiedman: So BlackRock acquired BGI back in 2009. The origin of that transaction was very simple. We had clients who held active mutual funds and ETFs in their portfolios. Now, I have to tell you, Ron, within BlackRock, there was a theological debate about whether ETFs and active mutual funds could coexist in the same firm. How can you put peanut butter and chocolate together? How can you do that? And the answer is, you can, because our clients already were. So the notion that actually these things couldn't come together was making it about us, as opposed to the client. And the transformation for BlackRock was taking that leap and saying “no, the client stays at the centre”, and what we’re going to do is actually help that client build the whole portfolio.
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text: ETFs around the globe
Ron O'Hanley: Mark, you have spent a lot of time outside the US. Tell us about what's going on outside the US in ETFs.
Mark Wiedman: What's happened over the last 30 years is that, while the US continues to be by far the most deep and liquid market, we now see deep and liquid ETF markets in many countries because of the underlying technology, this ability to create a fund that trades like a stock. We're seeing wealth managers across Europe, but it’s not just in Europe – we’re seeing in Mexico, in Japan, in China, in Australia, Canada, these are all markets where there's a deep local set of ETFs. The trades that are easily accessible to local investors who can build global portfolios using vehicles traded on the Tokyo Stock Exchange, the Toronto Stock Exchange, the Mexican exchange, wherever it is – to access it domestically without actually having to go to other countries to trade.
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Text: The next big thing for ETFs
Ron O'Hanley: Mark, as you look forward, 30 years is not a long time in financial markets. What's the next big thing that you foresee in ETFs?
Mark Wiedman: If you look at the history of the mutual fund, which is roughly 100 years old, it has taken decades for mutual funds to get to maximum size. So I think that the dominant story for the next 30 years is going to be the progressive adoption of ETFs in more asset classes, more vehicles, more portfolios, more scale. The biggest ETFs today in the two, three, $400bn range. There's probably going to be a trillion-dollar ETF within our professional careers. We’re going to see ETFs today that are at the $10bn level get to $50bn or $100bn because what’s happening – and this is part of the magic of the ETF – is that as the ETF gets larger and larger, as its operating costs drop, as its liquidity, its secondary liquidity rises, clients benefit directly. There are direct network effects as ETFs grow. The individual ETF gets more and more efficient to use, ETFs as a category get more and more efficient to use, and so I think that, while ETFs are a huge success story, years ago we thought $10tn in ETFs would eventually happen… we’re there: $20tn, $30tn, I think are very much in sight over the long horizon as we can progressively grow.
Ron O'Hanley: Mark, it's been a real pleasure spending time with you today.
Mark Wiedman: Ron, it's a great pleasure to be with you and with State Street. Thanks very much.
